Can crypto transform the MBS market?

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BLOG VIEW: Can Mortgage Backed Security Chain (MBSCain) Combined with MBS Crypto Currency (MBSCoin) Transform the MBS Market for the Better?

Absoutely. MBSChain is the MBS version of the blockchain while MBSCoin is the digital currency of MBS. The table below shows MBSChain’s current and new delivery profile for securities, loan management and guarantors, along with their different values. Readers will recognize the profile as an FNMA / FHLMC delivery, but with a slight modification, a GNMA security or private label sale is possible.

Note: Definitions of blockchain and digital currency appear at the end of this article.

Note: This article uses MBSCoin and sells monthly security certificates paying loan manager and guarantor with principal and interest. We could have kept the current structure of paying the server and guarantor with interest only by dividing MBSCoin into MBSInterestCoin and MBSPrincipal Coin.

Each month, a new pool of MBSCoin master securities is created, backed by loan arrangements with a single issuer or with several issuers. The first security is similar to a Genesis Block to which the first personalized public security key is assigned for identification. From this main MBSCoin pool, three sub-pools are formed, an MBSCoinI pool for investors, an MBSCoinS pool for lending services, and an MBSCoinG pool for the guarantor.

One might ask why are all the complications / divisions necessary? MBSCoin coordinates the funding of loan management assets, issuer / service obligations, guarantor insurance and oversight, implicit / explicit government support and the exchange of US dollars as the backbone of dynamic primary and secondary securities markets.

Note: MBSCoin can be assigned at the loan level, creating the Genesis block at the most granular level.

How does the process work for market participants?

The sender is assigned a public digital key for each title ensuring the identification of the MBS participant; brokers provide a price for each historical monthly transfer of securities, as well as a security price to be determined for the pools at the time of issue. Once the issuer receives the MBSCoinI security, a private security key is assigned to initiate security transactions. In our example, the issuer MBSCoinI represents a pro-rated 95.69% stake in the master MBSCoin.

The issuer / manager is paid via MBSCoinS (which means they receive capital (in the form of MBSCoinS) in advance for the lifetime service fee) and receive a private digital key to activate monetization / l exchange of loan service charges to cover service charges. The secondary market for loan management rights would use MBSCoinS. Each issuer / seller of securities would have a loan servicing subsidiary which houses (escrows) the remuneration of the service agents and pays the expenses of the latter. Loan management assets would be self-funded, eliminating the current capital cost of banks and the under-capitalization of non-bank financial entities. In this example, the MBSCoinS issuer / server represents a 1.27% stake in the master MBSCoin.

The guarantor is paid through MBSCoinG (meaning he receives a one-time insurance premium to cover security losses and server obligations) and receives a private digital key to activate loan loss payment and potentially the cost. the provision of a backup service. The warrantor is backed by the implied and / or express warranty of the United States government. MBSCoinG represents 3.04% of the master MBSCoin.

The guarantor / exchange ensures the monetization of MBSCoin (MBSCoinI, MBSCoinS and MBSCoinG) in US dollars possibly via a centralized depository. A private digital transaction key will allow the guarantor / custodian / exchange to validate primary and secondary market MBS transactions, service transactions and guarantor transactions as a third party signatory or escrow agent.

The investor receives MBSCoinI security pools upon purchase. The composition of the capital and interest of the pools (see the previous table), so that prepayments and monthly payments will result in somewhat different but insignificant prices.

Note: MBSCoinI could be traded in US dollars assuming the guarantor’s exchange offers the same price for both MBSCoinS and MBSCoinG.

The investor / trader will need a public digital transaction key for identification and complete transactions from issuer to investor / trader (primary market) and investor / trader to investor / trader (secondary market). The investor / trader makes a market on each of the monthly securities constituted as well as a loan security during the issue as part of the pooling / securitization process.

The diagram below summarizes the responsibilities and relationships between issuers / sellers, lending services and guarantors using digital delivery.

Blockchain technology and cryptocurrency are revolutionizing many industries and can do the same for the mortgage market. The example of using MBSChain and MBSCoin is one of many possible solutions that would provide initial compensation to loan officers and guarantors who would be paid in MBSCoin the same way as investors. In addition, the three participants would be paid on a pro rata basis of principal and interest, thereby reducing the exposure to interest rate risk of prepayments.

It would also create an MBSCoin exchange for US dollar transactions between participants and give third-party verification.

MBSCoinS and MBSCoinG will have certain limits to ensure that exchanges of US dollars are only for payment of expenses, loan losses or transfers.

NOTE: Server and Guarantor “slots” can be filled by other Operators / Credit Boosters, allowing a private label solution for running MBS and / or government agency support.

Finally, it resolves the long-standing problem of reassuring investors about the coordination of transactions, loan service obligations and industry guarantees. Investors will recognize MBSChain as a holistic approach to collateral and trades compared to the piecemeal system used today.

Definitions:

Blockchain: A system in which a record of transactions made in bitcoin or other cryptocurrency is kept on multiple linked computers in a peer-to-peer network

Cryptocurrency: A digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than a centralized authority.

Genesis Block: The name of the first Bitcoin block ever mined, which forms the basis of the entire Bitcoin trading system.

Public cryptographic key: A cryptographic key that can be obtained by anyone to encrypt a message for a particular recipient, so that encrypted messages can only be decrypted using a second key known only to the recipient ( the private key)

Private Cryptographic Key: A cryptographic key that can be used to unlock and lock the public key. Public key cannot derive private key

Nick Krsnich is a Managing Member of JMN Investment Management, a financial industry advisory and portfolio management firm. He was previously chief investment officer of Countrywide Financial Corp. and member of the Board of Directors of Countrywide Bank.

Photo: Hitesh Choudhary

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